Analysis: Some revenue hikes likely in budget deal

WASHINGTON (Reuters) - Republicans reject revenue increases in deficit-reduction talks, but the betting in Washington is that if and when a budget deal is brokered, at least a few of those Democratic ideas will be included.

"At some point, they've got to sit down and talk turkey. This is too big to be handled just on the cost side of the ledger or just on the revenue side of the ledger," said Bill Frenzel, a former Republican congressman who specializes in budget and tax policy at the Brookings Institution.

The political stakes are high for President Barack Obama and House Speaker John Boehner who risk alienating their core supporters with spending cuts or tax increases that go too far as they try to cut a $1.4 trillion budget deficit.

Lawmakers and private-sector budget experts agree that raising income tax rates for the wealthy, or anyone else, is a political impossibility as Washington races against the clock for a budget deal intended to clear the way for raising the government's credit limit by August 2.

The current strategy of Obama and fellow Democrats in Congress is to portray Republicans as being on the wrong side of a class war. They accuse Republicans of protecting tax breaks they say help the wealthy fill their playgrounds with corporate jets, yachts and race horses.

Democrats are gambling that Republican opposition to new taxes will crack under the pressure of public opinion.

If that happens, a hodgepodge of measures closing special interest tax breaks could be tucked into a budget deal that aims to save anywhere from $1 trillion to $4 trillion over the next decade, according to some lawmakers and analysts.

MEDICARE TRADE-OFF

The chances of these kinds of tax hikes becoming an ingredient in a deficit-reduction plan greatly improve if Democrats agree to changes to the popular Medicare healthcare program for the elderly, as demanded by Republicans.

Some budget and tax specialists have suggested that higher Medicare premiums might be part of the trade-off.

The revenue measures could include the immediate repeal of an ethanol blenders tax break, a scaling back of tax favors for luxury goods and rolling back preferential tax treatment Wall Street fund managers enjoy on some of their profits.

Politically it would be a tough step for Boehner, the top Republican in the House, to agree to any revenue increases. Most House Republicans have pledged never to raise taxes and Tea Party conservatives in particular want to cut spending and the size of the federal government.

Boehner likely would underscore to his fellow Republicans that income tax rates, including for the wealthy, would not be raised and that the tax increases would merely tighten or eliminate narrow tax breaks that do not have wide backing.

Democrats have proposed revenue increases totaling $200 billion to $400 billion, but any deal with Republicans would almost certainly be much smaller.

While many Republicans are steadfastly opposed to any such ideas, some have left the door open. "I'm very familiar with the details of all of these (revenue changes) but I want to see a package" before deciding, Senator Bob Corker told Reuters.

On the Democratic side, Senator Kent Conrad said he would back a proposal that would both raise revenues and cut spending as many tax breaks and social programs are annually adjusted by the rate of inflation. This tougher yardstick could save billions of dollars.

"I don't see any problems from Republicans on that. Some look at it as low-hanging fruit," said William Hoagland, a former Republican Senate aide.

Andy Laperriere, an analyst with the ISI Group in Washington, expects some revenue increases will be in a budget deal, but said "I think it will be very limited in scope."

(Writing by Richard Cowan; editing by Anthony Boadle)